Hello stagflation

US Labor Department data showed that the consumer price index jumped 7.9% from a year ago following a 7.5% annual gain, the highest yoy gain in 40 years.

What is high for US would be high for everyone else eventually. Even if you are not an investor, you will be concerned about the rising costs of living. It doesn't feel good to pay for higher prices on necessities and leave you with less money to buy stuff you desire. Air ticket prices may go up just when you thought you could travel after two years of Covid.

How likely is inflation going to persist?

Some believe that the commodity price spikes were caused by the ongoing war between Russia and Ukraine and hence, prices should come down should the war ends.

This is only one of the two factors.

The war did cause a sudden spike in prices in the recent weeks. We also saw commodity prices coming down when President Zelenskyy softened his stance on NATO membership and the breakaway states. But talks in Turkey has just failed. Commodity prices are likely to swing up and down wildly following such political news but yes, the war has a direct impact.

However we should not be too quick to think that a ceasefire would kill off the inflation woes. Sanctions are likely to be in place even if the war ends and Russia's absent supply would have to be covered by other countries.

US has been requesting OPEC to turn up the tap and UAE has been mulling it. Saudi Arabia has said no. Hence, the supply gap may not be fulfilled and prices may remain high.

The second factor is due to a combination of the Fed's liquidity and supply shock from Covid. This has caused prices to go up since a year ago, way before the war started. The Fed has decided to raise interest rate because of this.

Senior Minister Tharman gave a speech about a "perfect storm" during the IMAS-Bloomberg Investment Conference. He related the current situation to the double-digit inflation in the 1970s. But this time it is more complex because it isn't just an oil shock, but it includes "food, metals and fertilisers".

He went on to say that economic models aren't going to work well and that central banks would have a huge challenge to navigate this uncharted waters. A stagflation is in the cards - persistent inflation and slower growth.

I agree with him and the Fed is in a dilemma. Initially it was more of an inflation problem and raising rates would be the natural cause of action to tame it. But the Russia-Ukraine problem threw a spanner and disrupted trade and slowed economic growth. The economy was recovering from Covid and now this.

Raising rates could endanger the economy and may sink it into a recession. So raise or don't raise? Either action may yield unintended consequences where the magnitude of impact is unknown.

It might be a good idea to buy things now, especially those that are imported from China. This is because coal prices have soared more than 500% from a year ago and coal makes up more than 50% of China's energy sources.

Being a factory of the world, China consumes more energy producing stuff for others and the rising cost might be passed down to consumers. We have not felt it yet but it might just be around the corner.